Are LNG prices the next terms of trade hit?

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I’ve just read an outstanding LNG analysis from The Oxford Institute of Energy Studies which included this description of LNG contract pricing:

A major challenge facing new Australian LNG projects is that the pricing environment which they are likely to face in Asian markets is changing. Most of the LNG offtake from the projects under construction in Australia was contracted before the concept of US LNG exports was considered to be a commercial likelihood, with the implication that LNG could now be priced on the basis of Henry Hub gas. LNG from the Australian projects under construction was contracted on oil-related pricing formulas, with slopes in the traditional 14-15.5% range, with oil price floors included in some contracts in a range of $40-60/bbl and ceilings of 80-110/berms of trade bl. Most of the newer contracts include some form of price review, to ensure that neither the buyer nor seller are stuck in a long-term contract that is out of the market, and this does create some risk even for the projects under construction, as they could face a price renegotiation if Henry Hub prices remain low and the current oil-linked contracts are therefore an excessive burden for consumers. More likely, though, is that any new projects will have to adapt to a lower price environment and will need to be competitive with US LNG exports, based on some assumption of Henry Hub prices. In November 2013 BG signed a wide-ranging agreement with Chinese company CNOOC that included a sale of 5 mtpa of LNG for 20 years beginning in 2015, sourced from the Group’s global portfolio. It is understood by the authors that this LNG sale is priced on a hybrid US Henry Hub/oil-related basis. As some of this LNG is likely to come from QCLNG, it can be deduced that some LNG sales from Gladstone will likely be on a hub-related pricing basis. The pressure for other sellers to adopt this, or similar model, and therefore for specific projects to accept a lower price, is likely to increase if they are to be competitive in a global gas market with increasing supply options, with the alternative that surplus volumes will need to be sold on the spot market, giving additional offtake and pricing risk.

To estimate the contact price is no picnic, then, but using a rule of thumb I’ve charted LNG contracts at 15% of the landed Japanese oil price and here it is:

LNG j
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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.